The Budgeting Process At SVH

July 5, 2017

We recently completed the hospital budgeting process for the new fiscal year. Since there have been questions about the budget, I’d like to share some insights into how we arrived at our decisions this year in allocating the budget.

The new $63 million budget maintains the current levels of services and volumes for most hospital departments, with additional volume and revenue projected for surgical services and the 1206b physician clinic. If you would like more details, the budget is available on our website.

The budget process begins with our entire leadership team, which reviews department operations and makes recommendations for the coming year. These go to accounting and administration for review before being provided to the board’s Finance Committee, which conducts a final analysis before sending it to the board for approval. Many questions are asked at each step in the months-long process.

In reviewing service lines, you will see a pattern emerge. How the hospital is compensated is complex and very unlike other industries because government and private payers largely determine our compensation based on many factors. As a result, we need to look at revenues resulting from the broad continuum of interconnected services, and not simply for individual service lines because offsetting revenues and costs appear in many different places.

We benefit from new analysis tools we developed to better understand how each service area contributes both directly and indirectly to margins. This emphasis on margins is a recent development, and all of our directors are now comfortable discussing their budgets with an eye to margins.

Emergency Department – This is our core service and the most important to our community. The ED represents over 50 percent of our costs due to its 24/7 operation. It requires an acute hospital ICU, as well as physicians (both on premise and on call). It also requires broad hospital resources, from pharmacy and radiology to I.T. and environmental services.

Acute Care Hospital – SVH is unique in that it maintains a positive margin on CMS (Medicare) patients; most hospitals lose money on Medicare patients. Working efficiently within Medicare regulations is critical for us because 74 percent of our gross revenues now come from government insurance programs, mainly Medicare. According to CMS, our spending per Medicare beneficiary is very low – in the 90th percentile – because of our cost efficiencies.

Skilled Nursing Facility – We have a CMS 5-star rated nursing care service for longer term patients. This is a unit our community loves for its excellent rehabilitation services and because it is close to home for families. This unit has a small direct margin, but having it keeps our length of stay down. Without it, we would have a serious excess day problem in Acute Care which would adversely affect our margins there.

Outpatient Services – This includes Radiology, Lab, Cardiology, PT, Surgery, Occupational Health, Wound Care, and Nutrition Counseling services.  Each of these services is structured to bring in revenue above their costs and the community appreciates having them available locally. 

Home Health Care – This elite and highly appreciated service has been part of SVH for many years. Currently, 40 percent of our business is in serving Kaiser patients and we have over 80 percent market share in our region, but margins continue to tighten due to cutbacks by insurance payers. We have been closely watching expenses here for several years and, to reduce overhead further, we’re moving Home Health offices back into the hospital in the coming year.

Physicians – We have increased the number of physicians locally to cover almost every specialty through our office time-share strategy, an investment that is paying off in keeping more patients from needing to leave the area for services. In addition, we have supported the Prima physicians and have started a physician clinic to add a much-needed general surgeon. Without the hospital, many physicians could not stay in Sonoma.

There are additional factors that figure into our budgeting:

Overhead – We maintain the lowest possible overhead. Essential departments such as HR, Finance, Administration, Quality and Case Management are structured so that many leaders have crossover responsibilities that maximize their efficiency and reduce the need for the additional layers of staffing that is typical at other hospitals.

Personnel – Our single largest cost is personnel where we’ve needed to invest to maintain compensation at market level in order to recruit and retain good staff. Salaries and benefits represents 68 percent of our total budget. Hospital salaries were 35 percent behind market when I started in 2010 and we have gradually moved them to a mid-market level where they need to stay. We continue to scrutinize the number of FTE’s in our overhead and recently eliminated or reduced three executive positions. The new budget allows for the addition of only one full-time employee this year.

Growth – We invest in business development and marketing to grow our services and increase revenues. This includes marketing certain services outside of the Sonoma Valley, which has contributed to our increase in surgeries. Growth efforts in FY17 created $1.8 million in new revenue. The cost for development and marketing was one-third of that, providing a 200 percent ROI for this investment.

Capital Expenditures – SVH is unlike most other hospitals because our level of capital expenditures is so low – about a tenth of what other hospitals spend. This is out of necessity due to our tight control on expenses. Fortunately, we enjoy strong community support in this area and our Foundation now raises more than $1 million a year for capital equipment. 

Debt – Our debt level continues to decrease as we have almost paid off the government-mandated Electronic Health Record system, a $6 million investment. The repair and maintenance for our building, parts of which date back 60 years, and which was deferred for so many years, has cost us over $10 million in the last seven years, only part of which was covered by the GO earthquake bond approved by our community several years ago.

In Conclusion

All of this results in a budget of $63 million this year. It’s a budget that has reduced expenses as much as possible and still maintains quality.

I believe the community gains much from its investment: ready access to emergency and acute care services, excellent patient experience and satisfaction, high quality care as measured by CMS, high staff satisfaction and low turnover, no unions (we are one of the few hospitals without a union in the Bay Area), physicians saying it is a great place to practice, and broad economic benefits to the Sonoma Valley in having SVH as one of its largest employers.

We’ve accomplished all of this while maintaining the operating loss at an average of $4.5 million over the last five years, before adding in the funds from the parcel tax and philanthropy. Those funds are needed to get us close to breakeven. We could not operate the hospital we do, with the level of care provided, without the parcel tax.

This budget is in line with previous years and represents a highly efficient hospital. I have to add that many of my colleagues at other Bay Area hospitals have been in awe of how we have managed to maintain an independent small hospital given the financial pressures on community hospitals today. This is because we are conscientious stewards of hospital resources and because our community continues to support its hospital.

We have a great hospital and we’re very grateful that the community agrees, and that it approved the parcel tax so we can keep it. 

In good health,

Kelly

Kelly Mather
President and Chief Executive Officer
Sonoma Valley Hospital